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Daniel
ParticipantPowayseller,
A lot of the MBS paper is of pretty good quality. I know, there are a lot of risky mortgages around, with “foreclosure” written all over, but that’s the exception, not the rule. Let’s put things in perspective: if 5 out of 100 outstanding mortgages default, that would be the equivalent of “blood in the streets”. Complete crash and panic. Imagine 1 out of 20 houses in foreclosure. Really bad. But for the MBS holders, it may be not pretty, but not a disaster. They still get paid interest on 95% of their holdings, and the 5% that default won’t be a total loss (they unload the REOs, and still get something for them). If the interest rate they are paid is high enough, they might turn a profit even with 5% of hodings in default. Also, keep in mind that when these things are packaged into MBSs, they spred the risk not only over many borrowers, but over many markets, too.
Now for the bond ratings, yes, a lot of them can be AAA. Why not? Move-up buyers usually have both good credit and substantial equity from the sale of their home. Even in the worst of crashes, the rate of default in many segments of the market will be very low.
Now, there’s also subprime paper, where there is a large concentration of risky loand made to first-time buyers. That is likely to get hit much harder. Obviously, that is not rated anywhere near AAA.
As a final disclaimer, I don’t own any MBS paper (neither high-rated nor sub-prime), and I don’t recommend it either. Chances are, the returns on both will be lousy going forward, although I don’t think anybody will be losing their shirts on high-rated MBSs.
Participant“Naw the next scam will be no payments or interest rates till 2008!”
That’s a good one. Actually, you may be on to something there. That’s how they sell sofas, so houses can’t be far behind…
ParticipantI/O payments are already lower than those for 50-year mortgages (I/O is an “infinite duration” mortgage). And neg-am is as far as affordability products can go. I think we reached the end of creative financing. I can’t imagine what can possibly go further than negative amortization.
ParticipantOK, to check that we’re all on the same page, let’s state this: although blanket statements like “south of 8”, “north of 8”, etc are obviously incorrect, I would say that it is true that San Diego has a fair share of distressed neighborhoods (wherever they may be located).
I think that San Diego’s median is lower than that of VC and OC precisely because of that. Although I’m sure OC and VC have their own bad neighborhoods, I would argue that San Diego probably has a higher share of them. Those who know more about SoCal demographics, please feel free to correct me if I’m wrong.
ParticipantI agree. The median in North San Diego County is probably substantially higher than 500K. The overall median is pulled lower by the distressed southern neighborhoods.
ParticipantPowayseller asked…
“If Roubini is right, and the Fed cuts rates at its September meeting, thus fulfilling the mid-term election year political promise, could the stock market rally for one year? In spite of weak earnings and lower GDP and rising oil prices?”
Sure it could. Or it could not. Perhaps there is a chance to time the RE market, but I’d say there is absolutely no chance to time the stock market. At least, I know I can’t do it (perhaps smarter traders can), so I’m not even trying.
By the way, one of my favorite blogs, http://www.crossingwallstreet.com, just had a piece on the stock market and election cycle. It’s interesting reading, but I’d suggest not to draw too many practical conclusions out of it.
ParticipantWell, what can I say? Good luck and more power to you! As for when I’ll buy, it is going to be when my favorite metric (present value of future rents divided by future homeowner costs) gets back in line. But I’m not kidding myself that I’ll be able to “time the bottom”. Once I find an entry point that looks reasonable to me, I will choose buying over renting. If the market continues to go down a while after that (overshooting on the down side), I won’t sweat it.
ParticipantSchahrzad,
You’re on to something, but I think (like others here do) that you’re overestimating your skills. What you’re right about is that timing the RE market should be easier than timing the stock market, because RE moves much more slowly. But it’s still not a cakewalk.
Let me give you an example: the London propery market has been as overvalued as our own local market. After rate raises from the Bank of England in 2004, the London market had a very lousy year in 2005 (very much like SD in 2006). All analyst said: “OK, it’s finally going down now, look out below!”. So the market dipped a bit in 2005, but came back strong in 2006 (up 10%). Now, this is still overvalued as hell, even more so than before. Everybody is scratching their heads, not knowing what will happen next. All analysts agree that the market has to go down, sooner or later, but this year’s surge was a complete surprise. Timing that sort of market is a fool’s game.
ParticipantAre drinks for Piggington folks so expensive???
ParticipantPowayseller,
There is not a chance they will substitute house prices for rents in the CPI. It doesn’t make any economic sense to include asset prices in the CPI (only goods and services are allowed, and rent IS a service).
Mark my words: if they ever do that, I will publicly retract the above statement, and buy everyone at Piggington a drink. And yeah, I’ll also move all of my assets out of the dollar.
ParticipantPowayseller,
The 9 and 10-month supply figures in that article are actually too optimistic, because they divide the total number of houses on the market by the number of June sales. But June is typically an above average month (wait until December!), so the correct number is probably even higher than the 9-10 month figure. “Seasonally adjusted” figures would probably show a 12-month supply, if not worse.
ParticipantPerryChase,
Did the builders drop prices that fast in the early 90s? I didn’t know that. I too expect the builders to be the first to slash prices (can you say “motivated seller”?), but I have no clue as to how agressive they may get. Anybody else with memories of the 90s downturn?
ParticipantMath teacher? Are you saying MATH teacher? The other genius was an accountant, right?
ParticipantI agree, but many here won’t. I think it will be slow, slow, slow for a long, long time. The pain will be substantial, though, especially for those overstretched in “affordability” products.
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